EUR/USD: The Week Ahead

During the last week the euro depreciated against the USD. It lost almost 1.7% and finished the week at $1.3123.

As mentioned in several of our recent editions of the "EUR/USD: The Week Ahead" review, market expectations about the central banks' monetary policies on both side of the Atlantic, as well as the officials' rhetoric, continued to govern the EUR/USD movements. The main reason for the recent euro decline was the speech of Mr. Bernanke on Wednesday, who said the FOMC members expect that the FED will start to shrink its assets purchases in the second half of 2013. This caused the U.S. dollar to appreciate from the $1.34 level it traded then, which started three consecutive days of increases in its value.

Technically speaking, the euro might try to recover some of its lost ground in short term but the longer prospects remain vulnerable. As of time of writing it trades around $1.31 level, which is just below the 50% Fibonacci retracement level of the last big euro increase (from $1.28 to $1.34). Failing to sustain this level could lead the euro to at least $1.3035/40 or even $1.2940/50 area. With the lack of speeches of major politicians and economists during the week, or at least in its first three days, the EUR/USD rate is expected to continue to be under the influence of the recent central banks movements and rhetoric.

The Week Ahead

The most important risk events of the week are the U.S. durable goods orders(Tuesday), the U.S. GDP(Wednesday), the European Council meeting(Thursday and Friday) and Germany CPI(Friday). Those have the potential to present an increased volatility in the EUR/USD exchange rate and determine the near term direction of the pair.

This week's analysts' optimistic expectations are again close to the middle of the range (52%). This is about 25% lower than the previous week's optimistic expectations. Consensuses are more optimistic for the European data (64%) than for the U.S. one (37%), with the positive economic expectations for Europe declining slower than the ones for the U.S. Generally, this would be in favor of the single currency. The correlation between the last 4 week change in the optimistic expectations for Europe and the change in the EUR/USD rate for the respective weeks has turned slightly positive (0.11) for the first time in the last 2 months, and shows a rising trend.

The index shows the proportion the positive consensus estimates take in all the estimates we have available for the respective week. A value above 50% represents an optimistic mood in the expectations rather than pessimistic. The weekly change in index's value could be used as a tool to assess the analysts' mood. It should not be neglected however that the EUR/USD rate actually moves rather on the real data and on how that data differs from the expected one.

Investors could take advantage of their own expectations about the EUR/USD exchange rate movement in order to hedge the positions they have in other assets. For instance, American investors with investments in euro denominated assets who expect that the U.S. dollar would appreciate against the single currency, could try to decrease the currency risk by selling euros or by opening a short position in an ETF which tracks the price of the euro. CurrencyShares Euro Trust (NYSEARCA:FXE) is among the most widespread options here. It tracks only the price of the euro measured in U.S. dollars. This ETF has an expense ratio of 0.40%.

For those who prefer more diversified funds, among the options are the PowerShares DB USD Bullish ETF (NYSEARCA:UUP) and the PowerShares DB USD Bearish ETF (NYSEARCA:UDN). Both funds are U.S. dollar denominated and track the value of the USD against six other major currencies - euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The funds' expense ratio is 0.50%.

Monday, June 24

Event

GMT Time

EST Time

Consensus

Previous

EU Germany IFO Business Climate (June)

8:00

3:00am

105.7

105.7

EU Germany IFO Expectations (June)

8:00

3:00am

102.0

101.6

USA Chicago FED National Activity (May)

12:30

7:30am

-0.53

Click to enlarge

Monday is again relatively calm concerning the economic data. The positive expectations for the EU data prevail. Hence, any negative surprises there would weigh on the single currency.

A rise in the Chicago FED national activity index would be USD positive due to the expectations that any positive U.S. economic development would mean a closer end of the "easy money" policy of FED.

Tuesday, June 25

Event

GMT Time

EST Time

Consensus

Previous

USA Durable Goods Orders

12:30

7:30am

1.8%

3.3%

USA Housing Price Index

13:00

8:00am

1.3%

USA Consumer Confidence (June)

14:00

9:00am

76.6

76.2

USA New Home Sales

14:00

9:00am

0.460M

0.454M

Click to enlarge

Despite the expected decline of the durable goods orders, the new home sales and consumer confidence are expected to show increases. Those, if realized as expected, would be USD positive. Any negative surprise on the U.S. data on Tuesday would lead to euro appreciation.

Wednesday, June 26

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Gfk Consumer Confidence (July)

06:00

1:00am

6.5

6.5

USA GDP (Q1)

12:30

7:30am

2.4%

2.4%

USA GDP Price Index (Q1)

12:30

7:30am

1.2%

1.0%

Click to enlarge

The expected GDP value is lower than the previous one (2.5%) measured at April, but is still higher than the values from the beginning of the year. Negative surprises here would weigh on the U.S. dollar.

The GDP price index is important because it affects the inflation expectations. A rise would mean the FED would feel more pressure to take some real tightening of its monetary policy rather sooner than later. A lower-than-expected value here could put some weigh on the USD.

Thursday, June 27

Event

GMT Time

EST Time

Consensus

Previous

EU European Council Meeting

24h

24h

EU Germany Unemployment Change (June)

07:55

2:55am

7K

21K

EU Germany Unemployment Rate (June)

07:55

2:55am

6.9%

6.9%

EU Economic Sentiment (June)

09:00

4:00am

90.3

89.4

EU Consumer Confidence (June)

09:00

4:00am

-21.3

-21.9

EU Services Sentiment (June)

09:00

4:00am

-8.2

-9.3

USA Initial Jobless Claims

12:30

7:30am

354K

USA Personal Income

12:30

7:30am

0.2%

0.0%

Click to enlarge

The analysts expect the European economic data to be mostly positive and to show better-than-previous values. This leaves a significant room for negative surprises which could hurt the euro.

Strategically more important would be the European council meeting which continues on Friday, too. The economic policy is the focus on its agenda. Results and decisions might be expected in the area of boosting youth employment, competitiveness and financing of the economy. The progress on the European banking union would also be discussed. All those have the potential to increase the volatility of the EUR/USD currency pair.

Friday, June 28

Event

GMT Time

EST Time

Consensus

Previous

EU European Council Meeting

24h

24h

EU Germany Retail Sales (M-o-M)

06:00

1:00am

-0.4%

EU Germany CPI (Y-o-Y) p.

12:00

7:00am

1.5%

USA Chicago Purchasing Managers' Index (June)

13:45

8:45am

55

58.7

USA Reuters/Michigan Consumer Sentiment Index (June)

13:55

8:55am

84.5

Click to enlarge

The Germany CPI is important because it could hint the EU inflationary expectations. Those have significant influence on the ECB rate policy. Lower inflation expectations would mean a more relaxed monetary policy might be undertaken, and vise versa. Hence, a lower-than-previous value of the Germany CPI could lead to euro depreciation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.